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entitled 'End-Stage Renal Disease: Medicare Payments for All ESRD 
Services, Including Injectable Drugs, Should Be Bundled' which was 
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Testimony: 

Before the Committee on Ways and Means, House of Representatives: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 10:30 a.m. EST: 

Wednesday, December 6, 2006: 

End-Stage Renal Disease: 

Medicare Payments for All ESRD Services, Including Injectable Drugs, 
Should Be Bundled: 

Statement of David M. Walker: 

Comptroller General of the United States: 

GAO-07-266T: 

Mr. Chairman and Members of the Committee: 

I am pleased to be here to discuss highlights from our report entitled 
End-Stage Renal Disease: Bundling Medicare's Payment for Drugs with 
Payment for All ESRD Services Would Promote Efficiency and Clinical 
Flexibility.[Footnote 1] The report examines Medicare payments for 
certain drugs provided to patients with end-stage renal disease (ESRD), 
a condition of permanent kidney failure.[Footnote 2] 

Through Medicare's ESRD benefit, patients receive a treatment known as 
dialysis, which removes excess fluids and toxins from the bloodstream. 
Patients also receive items and services related to their dialysis 
treatments, including drugs to treat conditions resulting from the loss 
of kidney function, such as anemia and low blood calcium. The Centers 
for Medicare & Medicaid Services (CMS), the agency that administers the 
Medicare program, divides ESRD items and services into two groups for 
payment purposes. In the first group are dialysis and associated 
routine services--such as nursing, supplies, equipment, and certain 
laboratory tests. These items and services are paid for under a 
composite rate--that is, one rate for a defined set of services. Paying 
under a composite rate is a common form of Medicare payment, also known 
as bundling. In the second group are primarily injectable drugs and 
certain laboratory tests that were either not routine or not available 
in 1983 when Medicare implemented the ESRD composite rate. These items 
and services are paid for separately on a per-service basis and are 
referred to as "separately billable." 

Over time, Medicare's composite rate, which was not automatically 
adjusted for inflation, covered progressively less of the costs to 
provide routine dialysis services, while program payments for the 
separately billable drugs generally exceeded providers' costs to obtain 
these drugs. As a result, dialysis facilities relied on Medicare's 
generous payments for separately billable drugs to subsidize the 
composite rate payments that had remained nearly flat for two decades. 
In addition, the use of the separately billable drugs by facilities 
became routine, and program payments for these drugs grew 
substantially. In 2005, program spending for the separately billable 
drugs accounted for about $2.9 billion. Medicare's payment for these 
separately billable drugs is the focus of my remarks today. My remarks 
are based on the information included in our aforementioned report. 

Background: 

Since the Medicare Prescription Drug, Improvement, and Modernization 
Act of 2003 (MMA) was passed,[Footnote 3] how separately billable drugs 
are paid for has changed--from payment based on each drug's average 
wholesale price (AWP),[Footnote 4] to payment based on each drug's 
average acquisition cost, to payment based on the manufacturer's 
average sales price (ASP) for each drug. Specifically, beginning in 
2006, payment for each drug is set at ASP + 6 percent. 

In recent years, CMS has been exploring, as required by the Congress, 
the creation of a bundled payment for all ESRD services, including the 
drugs that facilities currently bill for separately. In response to a 
mandate that CMS study the feasibility of creating a bundled 
payment,[Footnote 5] the agency issued a study in 2003 concluding that 
developing a bundled ESRD payment rate was feasible and that further 
study of case-mix adjustment--that is, a mechanism to account for 
differences in patients' use of resources--was needed. In the MMA, the 
Congress required that CMS report on the design of a bundled 
prospective payment system for ESRD services, including a case-mix 
adjustment methodology, and conduct a 3-year demonstration to test the 
design of a bundled ESRD payment system.[Footnote 6] 

New Payment Provisions Reduced Subsidy from Separately Billable Drugs 
but Did Not Eliminate Incentives to Overuse These Drugs: 

The effect of several legislative and regulatory changes since 2003 has 
been to raise the composite rate for dialysis services while reducing 
Medicare's pre-2005 generous payments for separately billable ESRD 
drugs. Under the first legislative change in 2005, Medicare 
expenditures for certain of these drugs dropped 11.8 percent. Under the 
current payment method, based on the ASP for each drug, Medicare's 
payment rates have varied from quarter to quarter but have remained 
relatively consistent with the lower 2005 payment rates. 

The ASP-based rates are an improvement over the pre-MMA method, as ASP 
is based on actual transactions. However, certain unknowns about the 
composition of ASP and the ASP-based payment formula make it difficult 
for CMS to determine whether the ASP-based payment rates are no greater 
than necessary to achieve appropriate beneficiary access. For one 
thing, CMS has no procedures for validating the accuracy of a 
manufacturer's ASP, which is computed by the manufacturer. For another, 
CMS has no empirical justification for the 6 percent add-on to ASP. 
Regardless of how payment for these drugs is calculated, as long as 
facilities receive a separate payment for each administration of each 
drug and the payment exceeds the cost of acquiring the drug, an 
incentive remains to use more of these drugs than necessary. 

The ASP payment method is of particular concern with respect to Epogen, 
which in 2005 accounted for $2 billion in Medicare payments and is 
Medicare's highest Part B expenditure drug. Introduced in 1989, Epogen-
-the brand name for epoetin alpha--was an expensive breakthrough drug 
used to treat anemia in patients with ESRD. Most ESRD patients receive 
injections of Epogen at nearly every dialysis treatment. Preliminary 
data for 2006 suggest that Epogen use, which grew rapidly in the years 
before the MMA provisions took effect, continues to grow, although at a 
slower rate than previously. Epogen is the only product available in 
the domestic ESRD market for anemia management. However, the ASP method 
relies on market forces to achieve a favorable rate for Medicare. When 
a product is available through only one manufacturer, Medicare's ASP 
rate lacks the moderating influence of competition. The lack of price 
competition may be financially insignificant for noncompetitive 
products that are rarely used, but for Epogen, which is pervasively and 
frequently used, the lack of price competition could be having a 
considerable adverse effect on Medicare spending. 

Bundled Payment System for ESRD Services, Including Injectable Drugs, 
Would Promote Efficiency and Clinical Flexibility: 

Medicare's approach to paying for most services provided by health care 
facilities is to pay for a group--or bundle--of services using a 
prospectively set rate. For example, under prospective payment systems, 
Medicare makes bundled payments for services provided by acute care 
hospitals, skilled nursing facilities, home health agencies, and 
inpatient rehabilitation facilities. In creating one payment bundle for 
a group of associated items and services provided during an episode of 
care, Medicare encourages providers to operate efficiently, as 
providers retain the difference if Medicare's payment exceeds the costs 
they incur to provide the services. Medicare's composite rate for 
routine dialysis and related services was introduced in 1983 and was 
the program's first bundled rate. 

Experts contend that a bundled payment for all dialysis-related 
services would have two principal advantages. First, it would encourage 
facilities to provide services efficiently; in particular, under a 
fixed, bundled rate for a defined episode of care,[Footnote 7] 
facilities would no longer have an incentive to provide more ESRD drugs 
than clinically necessary. Second, bundled payments would afford 
clinicians more flexibility in decision making because incentives to 
prescribe a particular drug or treatment are reduced. For example, 
providers might be more willing to explore alternative methods of 
treatment and modes of drug delivery if there were no financial benefit 
to providing more services than necessary. 

In the MMA, the Congress required CMS to issue a report and conduct a 
demonstration of a system that would bundle payment for ESRD services, 
including drugs that are currently billed separately, under a single 
rate. Any payment changes based on CMS's report or demonstration would 
require legislation.[Footnote 8] Both the report, due in October 2005, 
and demonstration, mandated to start in 2006, are delayed, and CMS 
officials could not tell us when the report or results from the 
demonstration would be available. 

In light of these circumstances, we have asked the Congress to consider 
establishing a bundled payment for all ESRD services as soon as 
possible. In our view, Medicare could realize greater system efficiency 
if all drugs and services were bundled under a single payment. A 
bundled payment would encourage facilities to use drugs more prudently, 
as they would have no financial incentive to use more than necessary 
and could retain the difference between Medicare's payment and their 
costs. To account for facilities' increased or decreased costs over 
time, a periodic reexamination of the bundled rate may be necessary. 
This would ensure that facilities would be paid appropriately and that 
Medicare could realize the benefit of any cost reductions. 

Mr. Chairman, this concludes my prepared statement. I will be happy to 
answer any questions you or the other Committee Members may have. 

Contacts and Acknowledgments: 

For further information regarding this testimony, please contact A. 
Bruce Steinwald (202) 512-7101 or steinwalda@gao.gov. Contact points 
for our Offices of Congressional Relations and Public Affairs may be 
found on the last page of this testimony. Phyllis Thorburn, Assistant 
Director; Jessica Farb; and Hannah Fein made key contributions to this 
statement. 

FOOTNOTES 

[1] GAO, End-Stage Renal Disease: Bundling Medicare's Payment for Drugs 
with Payment for All Services Would Promote Efficiency and Clinical 
Flexibility, GAO-07-77 (Washington, D.C.: Nov. 13, 2006). 

[2] These drugs are covered under Medicare Part B, the part of Medicare 
that covers a broad range of medical services, including physician, 
laboratory, and hospital outpatient services and durable medical 
equipment. Part B-covered drugs are typically administered by a 
physician or other medical professional rather than by patients 
themselves. In contrast, drugs covered under the new prescription drug 
benefit, known as Part D, are generally self-administered by patients. 

[3] Pub. L. No. 108-173, 117 Stat. 2066. 

[4] Epogen, one of the separately billable drugs, was not paid under 
the AWP method. The method Medicare used to pay for Epogen was an 
amount set in statute for a single year--$10.00 per 1,000 units in 
1994. CMS continued to pay this rate at its discretion until 2005. 

[5] Medicare, Medicaid, and SCHIP Benefits Improvement and Protection 
Act of 2000, Pub L. No. 106-554, app. F,  422(b),(c), 114 Stat. 2763A- 
463, 2763A-516-517. 

[6] Pub. L. No. 108-173,  623(e),(f), 117 Stat. 2066, 2315-2317. 

[7] In the case of the composite rate, one dialysis session constitutes 
an episode of care. Unlike the current composite rate payment method, a 
newly designed payment bundle could define the episode of care more 
broadly. For example, the new payment bundle could cover dialysis and 
related items and services for 1 month. 

[8] The MMA specified that drugs billed separately at the time the 
legislation was enacted continue to be billed separately and not 
bundled in the composite rate. MMA sec. 623 (d)(1),  1881 (b)(13)(B), 
117 Stat. 2314-15 (to be codified at 42 U.S.C.  1395rr(b)(13)(B)). 

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